In a separate research report released Wednesday previewing quarterly earnings season, BMO Nesbitt Burns analyst Ben Pham shifted his preference to utilities over pipelines within his Canadian Energy Infrastructure coverage universe.
“The change is driven by: (i) relative performance. The pipeline group has outperformed utilities two consecutive years in a row (28 per cent vs. 11 per cent in 2021 and 10 per cent vs. down 10 per cent in 2022),” he said. “Compared with last year, forward utility P/E valuations compressed by 3.5 times to end the year at 16.0 times, while pipeline valuations were relatively flat year-over-year at 15.0 times. The robust commodity price environment, new organic growth announcements, easing of energy transition risk, and capital return initiatives (including share buybacks) all supported share price performance for the pipeline group. Those positive trends will likely continue, but probably reflected into share prices already; (ii) our expectation that 10-year bond yields decline during 2023 and the market will gradually shift to more defensive equities, such as the utility sub-sector. At the same time, inflation concerns are easing – headwinds for utilities in 2022 that should turn into tailwinds into 2023 (on a relative basis); and (iii) selective themes in the utility sector, such as our expectation for strong Alberta power prices (CPX, TA), upside to renewables growth (BEP, BLX, INE, and NPI), and potential unlocking of value in utility stocks ALA, AQN, and EMA. In other words, it could be again a stock picker’s market in Canadian Energy Infrastructure for 2023.
“After considering 2022 performance, relative valuations, growth differences, and macro drivers, we have adjusted our Top 5 Best Ideas to AltaGas (ALA), TransAlta (TA), Northland Power (NPI), Pembina Pipeline (PPL) and Emera (EMA).”